There's Still Hope Since The Train Hasn't Left The Station
In the last few months, "most" stock indexes have begun to behave much better and appear to be shaking off the bear market that began in early 2022. Interestingly, the recent strength has come as a surprise to even the most seasoned investors, given that the backdrop for the economy, inflation, and corporate earnings is less than constructive. Does the stock market know something that most investors don’t? Or is this recent strength simply another "head fake" of the bear market? This is an important question for all investors because when a bear market turns into a full-fledged bull, it is not to be missed! So, let’s dig in and share some thoughts that will help guide us in terms of strategy for your portfolio.
Most of the Bearish Factors Have Subsided
In the investment business and in life, there are things we know and those things that are, frankly, unknowable. In the current environment, we know that stocks have suffered from the Federal Reserve’s (and other global central banks') diligent fight against inflation. The old saying "don’t fight the Fed" was accurate as the aggressive policy of raising interest rates over the past 18 months has been detrimental to stock prices – until recently, as it appears. However, we know from the Federal Reserve’s testimony last week that they are not finished raising rates - since inflation is currently at 4%, and their target goal is to bring it to 2%. Why are stocks acting better if the Fed signals continue to raise rates? Is the stock market "discounting" something we don’t know? What could that be? It is quite possible that the market sees past and future rate hikes as enough to get inflation close to 2%, which may be the case.
Market Participation Doesn’t Signal Bull Yet
What’s interesting to our team, and one of our last significant concerns, is the analysis of the recent rise in stock indexes. If one examines the major global indexes, it reveals that most stocks within these "baskets" do not exhibit the same type of upside vigor as the indexes themselves. In fact, most stocks have been "stuck" near their lowest bear market levels. Upon further analysis, we see that only a handful of the largest capitalized stocks in these indexes have been truly good performers, which has masked the underperformance of the bulk of stocks in many indexes. Basically, stock indexes are rising due to a small group of their largest constituents – mostly large tech stocks, many of which you own in your portfolio. Unfortunately, this "narrow" leadership is not a typical sign of the beginning of a bull market, so we would caution investors from getting too excited just yet. However, it is a sign that we are getting closer to the bear’s end and a new business cycle – which we envision starts in earnest this summer after some further Fed policy moves and stock market adjustments.
Most of the Train is Still at the Station
If you’re worried that the proverbial "train has left the station" and suffer from FOMO (Fear Of Missing Out), keep in mind that most of the train hasn’t moved much at all this year, so a plethora of opportunities remain for the patient and prudent investor. The part of the train that seems to have left the station is the "engine," comprised of some of the largest tech stocks. We envision that the next market correction will most likely "back the engine up" so that the rest of the "cars" can join in what will be the true beginning of the bull market we envision in the second half of this year. In terms of our responsibility of managing the bulk of your liquid net worth and doing our best to keep your long-term financial goals and plan intact, it is important that the market is on more solid footing before becoming more fully invested.
Factors That Confirm a New Bull Market for Global Stocks
As we enter the summer months, the new bull market will need to be validated by a few things. The first is a normal pullback or correction from these levels that is sustainable above the past market lows – this is quite overdue, in our opinion and based on our research. Another one or two Fed hikes and continued improvement in inflation data will also help us confirm that the setting for the new bull market is complete. Lastly, the ability of the economy to avoid a significant recession is important to keep the status of the bull intact. The good news is that most of these issues will become apparent throughout the next weeks and months, allowing us to prepare for a better market in the second half of this year.
Our Additions of Stock this Year and More to Come
As we eventually leave the bear market and start a new, healthy bull market – one that is broad-based and not led by a handful of stocks – our team stands ready to increase your allocation to equities to a more normal level. Since the beginning of the year, you may have noticed that we have already been opportunistically purchasing partial positions in some great companies that we believe will lead this next business cycle and bull market. These include great technology companies involved in artificial intelligence (AI), healthcare leaders, consumer discretionary, industrial, and financials. We have more additions to come as markets provide opportunities and exhibit signs of greater and broader health. Keep in mind that stock indexes haven’t provided true returns for the last two years, and many stocks are still far below their old highs. When the new bull market arrives, it is quite possible – based on history – that stocks could double or triple from current levels. Something to look forward to!
Fixed Income
The silver lining of the Fed’s tightening cycle is the value created in the bond market. Thankfully, this has allowed us to lock in some very attractive yields for the foreseeable future. Remember that as the economy slows for Fed rate hikes, there is the potential for a recession and a reversal of rates; hence our objective is to extend bond duration beyond short-term maturities.
Optimism and Risk Management
In light of economic fundamentals beginning to improve, we want to be mindful that we are not yet "out of the woods" in terms of the economy staying firm or a number of other risks we are aware of and those that are unknowable. Therefore, we will continue to apply our Active Risk Management, which includes flexibility with your overall allocation to equities, sector management, and the application of carefully placed stop loss orders.
We hope this update finds you in good health and enjoying the start of summer. From all of us, thank you for your continued confidence in our work!